Investors see green in clean tech

Bob Epstein has lived an entrepreneur's dream: He co-founded database software company Sybase in 1984 in his garage and got rich riding the industry's rapid growth over the next decade.

Now, as he searches for the next big thing, Epstein is looking beyond software, even beyond the computer business. His new pursuit? Clean technology, a nascent category that covers everything from renewable energy to water purification systems.

"Software was no longer the glamour hot topic it was," Epstein said. "And it seemed that long term, the two big issues were going to be biotech and things that reduced the use of natural resources. Those would be the big areas in the future."

News.context

What's new: So-called clean technologies, which cover everything from renewable energy to water purification systems, are garnering more interest from investors and entrepreneurs previously tied to the information technology industry.

Bottom line: Venture investments in clean technologies are still a fraction of overall investments in technology. Still, some entrepreneurs are making the jump, motivated primarily by potential profits in an emerging field, as well as the beneficial effect on the environment.

Clean technology is an area "where the rules have yet to be established. There are new opportunities," said Epstein, who also continues to invest in software companies.

The phrase "clean technology" may conjure up largely unfulfilled 1970s-era promises to replace fossil fuels with solar energy. But new companies and clean tech ideas are attracting more interest from technology veterans such as Epstein and from mainstream venture capitalists looking for the next big thing.

Bill Joy, a co-founder of Sun Microsystems who joined venture firm Kleiner Perkins Caufield & Byers earlier this year, said he sees a "huge opportunity to create new more-efficient forms of energy and apply that to the economy."

Other high-profile investors, such as Vinod Khosla and John Doerr, also of Kleiner Perkins Caufield & Byers, have said they're exploring clean tech, while Google co-founders Sergey Brin and Larry Page were early investors in Nanosolar.

Some recent examples of growing investor confidence include solar energy companies HelioVolt, Energy Innovations and Nanosolar, which each announced substantial venture funding in the past few months. Mohr Davidow Ventures, which has a long track record in computer technology and biotech, participated in the Energy Innovations funding, as did Idealab, a company better known for its work in search and dot-coms.

Though the amount of money dedicated to clean technology start-ups is a fraction of what goes into technology overall, entrepreneurs and investors say the field is showing signs of a maturing and potentially profitable industry.

"Fundamentally what's changed more than anything else is the technology," said Nicholas Parker, chairman of investment group Cleantech Venture Network. "The crossover from IT and materials (science) into the clean tech space has dramatically improved the offerings of products and services and made it a lot more economically attractive."

As technologies to reduce industrial waste or cut down on pollutants improve, businesses are increasingly willing to invest in products for financial reasons, rather than simply to comply with regulations as they've done in the past, Parker said. That demand, coupled with new technologies, is helping to solidify the industry and create opportunities for entrepreneurs, he said.

Making the jump
Vivek Tandon has already made the transition from the information technology industry to clean tech.

Tandon looked at the environmental technology arena in the 1980s but decided it was too early to jump in. Instead, he got his Ph.D. in
optical networking, started a few networking start-ups, and acted as a venture capitalist in the telecommunications arena.

Then two years ago, Tandon co-founded his own company, Aloe Private Equity, to focus on the energy sector. The company's particular niche is choosing established technologies used by European energy utilities, such as catalysts that reduce pollutants, and taking them to the booming economies of Asia, notably China and India.

The transition from the telecommunications field to the energy industry was relatively straightforward, Tandon says. Deregulation of the energy industry over the past decade has prompted European utilities to invest in technology to become more competitive. They are also eyeing the use of telecommunications equipment to break into new areas, such as broadband over power line.

"You have similar problems: using software to prevent power outages versus a telecom going down, or handling a large number of customers," Tandon said. "It made it easy to get into that sector."

Entrepreneurs may not have the technical skills in solar technology, for example. But the process of taking a raw technology, creating products from it and selling to end customers can be applied broadly, experts said. "It's the business skills that are transferable," said Epstein.

Dual motivation
While there may be some signs of crossover of people from one technology field to another, the clean-tech arena is significantly different from IT, according to entrepreneurs and investors.

Customers in the energy industry tend to have much longer sales cycles than the IT industry. Because the adoption rate of clean tech is slower, different segments tend to be less competitive, and the potential returns are lower than IT, said Parker. "There are more base hits and fewer home runs," he said.

Clearly, there isn't likely to be a stampede of investors fleeing software, for example, in favor of clean tech. But interest is growing. Venture investments in clean tech companies surpassed $1 billion for the third straight year in 2004, according to Clean Tech Venture Network. There are already a number of firms specializing in the sector, such as San Francisco-based Nth Power, which focuses on energy.

By comparison, venture investing in software was $5.1 billion last year, which represents about one quarter of the total, according to the MoneyTree Survey by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Indeed, Mitchell Kertzman, a 30-year veteran of the software industry, doesn't see any noticeable brain drain from software into other areas.

"I can't tell you how many young entrepreneurs we see coming up who are still doing software. We're seeing phenomenally talented people starting software companies with real innovation," said Kertzman, a partner at Hummer Winblad Venture Partners, which invests only in software companies.

"But people who have made their mark and made their fortunes, yes, they are looking at new interesting things like environmental tech, biotech or nano," he said.

Still, the lure of promising technologies that can generate both a financial return and improve the environment is a strong draw.

At the same time, the desire to apply cutting-edge technology to improve the environment motivated Berzin, now chief technology officer, to launch the company.

"I felt I had the right tools to deal with the problem," said Berzin, who has training in mechanical engineering and biology. "The combination of the environment and renewable energy is worth it. It's very sexy to me."

Tandon, of Aloe Private Equity, said that helping cut down on evident pollution problems in places such as China or India is satisfying, but ultimately he is working in clean technology because he thinks the investments returns will be very attractive over the next 10 to 15 years.

"The demand for clean everything--air, energy products, clean water, recycling of tech, better use of waste material--all of that is very much fundamental to business practices," he said. "It's no longer something industries can ignore."